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I checked out crowd4cash and some other Swiss p2p lending platforms and am pretty impressed by the interest which borrowers are offering. Seems 8% is pretty common. Can I actually earn 8% interest per year by lending money out on peer to peer platforms? Is there a catch?
Hi there,
In peer to peer lending, high interest rates are generally associated with a high level of risk. As a general rule, the higher the interest rate offered by a borrower, the worse the creditworthiness of that borrower is. Borrowers who are not financially sound are more likely to pay high interest because they do not have other alternatives. While you can provide a loan to a high-risk borrower and earn interest of 8% or higher, investing large amounts of money in this category is not recommended.
The rule of thumb is: divide your investment between 20 different loans, with at least half of those loans being low-risk loans to borrowers with good to excellent creditworthiness. The higher your risk capacity, the larger the portion of medium- and high-risk loans you can add to your peer to peer lending investment portfolio.
Example: You have 20,000 francs to invest. You invest 10,000 francs of the money in 10 different low-risk loans to borrowers with good creditworthiness and earn 2% interest per annum on those loans. You invest 5000 francs in 5 different medium-risk loans to borrowers with average credit and earn 4% interest on those loans. You invest 5000 francs in 5 different high risk loans and earn 8% interest on those loans. You earn an everage of 4% interest per annum on your 20,000-franc investment, or 800 francs per year. At the same time, you are not exposing yourself to too much risk. If 2 high-risk borrowers defaulted on their loans, you would only lose 2000 francs plus 80 francs of interest per year. Over several years, that loss would be compensated for by the 720 francs per year of interest earned on the other loans.
Best regards from Moneyguru
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